At the end of the day, succeeding in business comes down to being better than the competition.
Usually, this isn’t a winner-takes-all all game; small and medium-sized businesses and giant conglomerates coexist, after all. Still, if you want to have any hope of making it as a business, you’ll need to be able to outcompete your rivals for enough customers to sustain your company’s bottom line.
When you’re trying to identify your sustainable competitive advantage, it helps to have a plan. And that plan is what we call a competitive strategy.
What is a competitive strategy?
A competitive strategy is a plan of action a company develops to compete with rivals within its market. This involves creating a set of strategies to communicate a brand’s unique value proposition to its target audience with the long-term goal of winning customers and sustaining the company’s bottom line.
Harvard Business School professor Michael Porter, in his 1980 book, Competitive Strategy, defined competitive strategy by laying out a simple framework of the three main battlegrounds where businesses typically compete with one another. These building blocks of competitive strategy, which Porter called his “generic strategies,” revolve around cost, differentiation, and focus.
Types of competitive strategies
Cost leadership, differentiation leadership, cost focus, and differentiation focus are the core strategies businesses use to outperform competitors.
Cost leadership
A cost leadership strategy is when a company serves a broad market and focuses on offering the lowest price to customers. Ikea is a classic example. It has aggressively pursued cost advantage in home furniture, a traditionally expensive vertical, by focusing on furniture that can be easily manufactured, shipped, and assembled at home by customers.
Differentiation leadership
Differentiation leadership strategy is when a company serves a broad market and focuses on distinguishing its product with a unique feature. For example, Lego products rely on the same distinguishing quality: They are interlocking “bricks” that can be endlessly repurposed to build just about anything. Lego has used this feature to differentiate itself and build a strong brand reputation, and is able to charge more than other toy companies due to this differentiation leadership strategy.
Cost focus
Cost focus is when a company serves a narrow market and focuses on offering the lowest price to customers. Spirit Airlines primarily pursues a cost focused strategy by specifically targeting budget-conscious flyers over the broader air travel market. Spirit Airlines offers a basic default flight package (i.e., checked bags not included) and flies a narrower set of routes to maximize its fleet’s efficiency.
Differentiation focus
Differentiation is when a company serves a narrow market and focuses on differentiating its product by highlighting its unique attributes or quality. Rolex is a legacy brand that has long pursued a differentiation focus strategy. Rather than attempting to serve a broad market, it focuses on making its watches a luxury item for wealthy consumers. Most luxury brands fall under this competitive strategy category.
How to choose competitive strategies for your business
Your choice of competitive strategy is typically informed by several factors and can change over time as your company matures or your market shifts. Here are some elements to consider when trying to identify the right competitive strategy for your business:
Goals and core competencies
Start with your short- and long-term goals as a business. If the products you’re passionate about bringing to market—say, custom surfboards—would only appeal to a niche segment of consumers, then you’re better positioned to pursue a differentiation focus strategy than one based on cost.
Consider your core competencies as well—what your business does better than competitors. If you’ve invested time in building great supplier relationships that have allowed you to bring down your prices over time, a cost strategy might be a good fit. If you have niche expertise, a unique product, or great marketing, you may shine by developing a differentiation strategy.
Limitations
Obstacles you face in your market will impact the strategy you choose as well. For custom surfboards, your limitations may include the high cost of labor, materials, and production equipment. Since your manufacturing costs are likely to be high, pursuing any kind of cost strategy is unlikely to work.
Business size
The size of your business informs your competitive strategy. Generally speaking, it’s harder for small- and medium-sized businesses to pursue a cost leadership strategy, since they’re likely unable to take advantage of economies of scale and sufficiently lower production costs and overheads. However, they can be far more nimble in their approach to product differentiation.
Take the beer market, for example. An established brands like Anheuser-Busch InBev (AB InBev) aims for cost leadership by leaning on its manufacturing capability, strong supply chain, and international distribution network. However, small craft breweries manage to compete with AB InBev in smaller markets by employing a differentiation focus strategy. Making smaller batches allows them to experiment, which can help them build a unique brand identity.
Brand reputation
How customers perceive your brand today should inform your strategy going forward. For example, big-box stores like Walmart, known for its low costs, lean into its cost leadership strategy to leverage future sales. Walmart makes pricing a primary feature of its brand identity by using slogans like “Save Money, Live Better,” and “Always Low Prices, Always.”
If you’re already known for providing premium products with a high level of service, then you’re likely using a differentiation strategy. As you grow, consider how you can lean into your strategy before you employ elements of cost competition. In short, if your customers are already telling you that your strategy works, listen to them.
Competitive landscape
Finally, your competitive strategy needs to account for your competitive landscape. What rival businesses are doing is likely to impact the strategy you pursue.
For example, if you’re breaking into an industry dominated by large players with massive distribution networks, competing on price might be difficult. If there’s room for differentiation, though, you might have a foot in the door. On the other hand, in an industry full of small, differentiated players with unique offerings at relatively high prices, even a small price advantage may be a sustainable competitive advantage.
Competitive strategy FAQ
What are the four competitive strategies?
The four competitive strategies, as laid out by Harvard Business School professor Michael Porter, are cost leadership, differentiation leadership, cost focus, and differentiation focus.
What is a competitive strategy?
A competitive strategy is a plan of action that a company puts into place to compete with rival companies in its market. It factors in both the fundamentals of a business and the competitive landscape to give you a sense of how you can build a sustainable advantage.
How do you determine a competitive strategy?
To determine your ideal competitive strategy, consider your goals, limitations, business size, brand reputation, and competitive landscape. Consider whether you can beat your rivals on price, or whether highlighting your unique offerings will make you stand out. Then consider whether you’re targeting a broad audience.
